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Coal credits pressured by regulatory issues, coal-to-gas transitions

Peabody 6% notes due 2018 are pegged right around par today, while quotes were 100.75/101.75 a week ago and 103.5/104 at the market peak in early March, according to sources. Certainly broad market conditions have weighed heavily amid the sell-off over the past week and a half.

The Environmental Protection Agency has not outlawed coal per se, but the rules on coal-fired generation have made it less profitable. Even Trip Doggett, president of the Electric Reliability Council of Texas, has come out publicly saying that the decision by the EPA to curtail emissions from coal-fired power would jeopardize the supplies of electricity in Texas. “It is unreasonable because it does not allow enough time to implement operational responses to ensure reliability,” Doggett said in a statement last year.

Conversely, that may have wound up helping another prominent distressed energy credit: TXU’s Texas Competitive Electric Holdings. With both its bank debt and bonds plunging to all-time lows, the highly levered private equity-backed utility – which was the target in the largest LBO in history – experienced a turnaround after revelations on its first-quarter conference call. First of all, a key measurement determining energy prices, the heat rate, went up materially in the first quarter and is expected to continue to rise. And the Texas regulators – the ERCOT and Public Utility Commission of Texas – have taken action to ensure there are enough resources in Texas.

The coal trends have also impacted Edison Mission. Bonds backing Edison Mission have continued to fall in value this week following disappointing results of the annual PJM capacity auction. The PJM auction establishes contracts with power producers. Capacity prices were higher than last year due to retirements of existing coal-fired generation resulting largely from environmental regulations, according a PJM press release.

The company’s $1.2 billion issue of 7% notes due 2017, the most liquid issue, has shed about three points since Friday, to a 59 context today, sources said. The all-time low print was 55 in January. But the most telling indicator was the drop in the company’s 7.5% notes due 2013, which hit all-time lows at 63.75 today, from above 70 on May 18. The CCC+/Caa1 senior notes have passed March 2009 credit-crisis lows and have declined more than 30 points since December.

Though most of the energy news has been bad for energy producers and energy-related credits, one party has continued to benefit with the trends: “It’s great to be a consumer in energy right now,” says Morningstar’s Rohr. – Max Frumes

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